1. © 2006 McGraw-Hill Ryerson Ltd.. Chapter Three Systems Design: Job-Order Costing

2. © 2006 McGraw-Hill Ryerson Ltd.. Learning Objectives 1.Distinguish between process costing and job- order costing and identify companies that would use each costing method. 2.Identify the documents used in a job-order costing system. 3.Compute predetermined overhead rates and explain why estimated overhead costs are used in the costing process. 4. Record the journal entries that reflect the flow of costs in a job-order costing system. After studying this chapter, you should be able to:

3. © 2006 McGraw-Hill Ryerson Ltd.. Learning Objectives 5.Apply overhead cost to Work in Process using a predetermined overhead rate. 6. Prepare the schedules of cost of goods manufactured and cost of goods sold that summarize the flow of costs. 7. Compute under- or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts. After studying this chapter, you should be able to:

4. © 2006 McGraw-Hill Ryerson Ltd.. Learning Objectives 8.(Appendix 3A) Explain the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period. After studying this chapter, you should be able to:

5. © 2006 McGraw-Hill Ryerson Ltd.. Types of Product Costing Systems Process Costing Job-order Costing  A company produces many units of a single product.  One unit of product is indistinguishable from other units of product.  The identical nature of each unit of product enables assigning the same average cost per unit.  A company produces many units of a single product.  One unit of product is indistinguishable from other units of product.  The identical nature of each unit of product enables assigning the same average cost per unit.

6. © 2006 McGraw-Hill Ryerson Ltd.. Types of Product Costing Systems Process Costing Job-order Costing  A company produces many units of a single product.  One unit of product is indistinguishable from other units of product.  The identical nature of each unit of product enables assigning the same average cost per unit.  A company produces many units of a single product.  One unit of product is indistinguishable from other units of product.  The identical nature of each unit of product enables assigning the same average cost per unit. Example companies: 1. Weyerhaeuser (paper manufacturing) 2. Reynolds Aluminum (refining aluminum ingots) 3. Coca-Cola (mixing and bottling beverages) Example companies: 1. Weyerhaeuser (paper manufacturing) 2. Reynolds Aluminum (refining aluminum ingots) 3. Coca-Cola (mixing and bottling beverages)

7. © 2006 McGraw-Hill Ryerson Ltd.. Types of Product Costing Systems Process Costing Job-order Costing  Many different products are produced each period.  Products are manufactured to order.  The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.  Many different products are produced each period.  Products are manufactured to order.  The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.

8. © 2006 McGraw-Hill Ryerson Ltd.. Types of Product Costing Systems Process Costing Job-order Costing  Many different products are produced each period.  Products are manufactured to order.  The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.  Many different products are produced each period.  Products are manufactured to order.  The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. Example companies: 1. Boeing (aircraft manufacturing) 2. Bechtel International (large scale construction) 3. Walt Disney Studios (movie production) Example companies: 1. Boeing (aircraft manufacturing) 2. Bechtel International (large scale construction) 3. Walt Disney Studios (movie production)

9. © 2006 McGraw-Hill Ryerson Ltd.. Comparing Process and Job-Order Costing

10. © 2006 McGraw-Hill Ryerson Ltd.. Quick Check Which of the following companies would be likely to use job-order costing rather than process costing? a. Scott Paper Company for Kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels. Which of the following companies would be likely to use job-order costing rather than process costing? a. Scott Paper Company for Kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels.

11. © 2006 McGraw-Hill Ryerson Ltd.. Quick Check Which of the following companies would be likely to use job-order costing rather than process costing? a. Scott Paper Company for Kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels. Which of the following companies would be likely to use job-order costing rather than process costing? a. Scott Paper Company for Kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels.

12. © 2006 McGraw-Hill Ryerson Ltd.. Manufacturing Overhead Job No. 1 Job No. 2 Job No. 3 Charge direct material and direct labour costs to each job as work is performed. Direct Manufacturing Costs Direct Materials Direct Labour

13. © 2006 McGraw-Hill Ryerson Ltd.. Manufacturing Overhead, including indirect materials and indirect labour, are allocated to jobs rather than directly traced to each job. Direct Manufacturing Costs Direct Materials Direct Labour Job No. 1 Job No. 2 Job No. 3 Manufacturing Overhead

14. © 2006 McGraw-Hill Ryerson Ltd.. PearCo Job Cost Sheet Job Number A - 143Date Initiated 3-4-05 Date Completed Department B3Units Completed Item Wooden cargo crate Direct MaterialsDirect LabourManufacturing Overhead Req. No.AmountTicketHoursAmountHoursRateAmount Cost SummaryUnits Shipped Direct MaterialsDateNumberBalance Direct Labour Manufacturing Overhead Total Cost Unit Product Cost Job-Order Cost Accounting

15. © 2006 McGraw-Hill Ryerson Ltd.. Materials Requisition Form Will E. Delite

16. © 2006 McGraw-Hill Ryerson Ltd.. Job-Order Cost Accounting

17. © 2006 McGraw-Hill Ryerson Ltd.. Employee Time Ticket

18. © 2006 McGraw-Hill Ryerson Ltd.. Job-Order Cost Accounting

19. © 2006 McGraw-Hill Ryerson Ltd.. Why Use an Allocation Base? Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labour hours, direct labour dollars, or machine hours, is used to assign manufacturing overhead to individual jobs. We use an allocation base because: 1.It is impossible or difficult to trace overhead costs to particular jobs. 2.Manufacturing overhead consists of many different items ranging from the grease used in machines to production manager’s salary. 3.Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

20. © 2006 McGraw-Hill Ryerson Ltd.. The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. Manufacturing Overhead Application Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR = Ideally, the allocation base is a cost driver that causes overhead.

21. © 2006 McGraw-Hill Ryerson Ltd.. Using a predetermined rate makes it possible to estimate total job costs sooner. Actual overhead for the period is not known until the end of the period. The Need for a POHR $

22. © 2006 McGraw-Hill Ryerson Ltd.. Actual amount of the allocation based upon the actual level of activity. Based on estimates, and determined before the period begins. Application of Manufacturing Overhead Overhead applied = POHR × Actual activity

23. © 2006 McGraw-Hill Ryerson Ltd.. For each direct labour hour worked on a particular job, $4.00 of factory overhead will be applied to that job. Overhead Application Rate POHR = $4.00 per DLH $640,000 160,000 direct labour hours (DLH) POHR = Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR =

24. © 2006 McGraw-Hill Ryerson Ltd.. Job-Order Cost Accounting

25. © 2006 McGraw-Hill Ryerson Ltd.. Job-Order Cost Accounting

26. © 2006 McGraw-Hill Ryerson Ltd.. Interpreting the Average Unit Cost The average unit cost should not be interpreted as the costs that would actually be incurred if an additional unit were produced. Fixed overhead would not change if another unit were produced, so the incremental cost of another unit may be somewhat less than $118. The average unit cost should not be interpreted as the costs that would actually be incurred if an additional unit were produced. Fixed overhead would not change if another unit were produced, so the incremental cost of another unit may be somewhat less than $118.

27. © 2006 McGraw-Hill Ryerson Ltd.. Quick Check Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labour hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labour hours were 20,000. What would be recorded as the cost of job WR53? a. $200. b. $350. c. $380. d. $730. Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labour hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labour hours were 20,000. What would be recorded as the cost of job WR53? a. $200. b. $350. c. $380. d. $730.

28. © 2006 McGraw-Hill Ryerson Ltd.. Quick Check Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labour hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labour hours were 20,000. What would be recorded as the cost of job WR53? a. $200. b. $350. c. $380. d. $730. Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labour hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labour hours were 20,000. What would be recorded as the cost of job WR53? a. $200. b. $350. c. $380. d. $730.

29. © 2006 McGraw-Hill Ryerson Ltd.. Let’s summarize the document flow in a job-order costing system. Job-Order Costing Document Flow Summary

30. © 2006 McGraw-Hill Ryerson Ltd.. Job-Order Costing Document Flow Summary A sales order is the basis of issuing a production order. A production order initiates work on a job.

31. © 2006 McGraw-Hill Ryerson Ltd.. Job-Order Costing Document Flow Summary Job Cost Sheets Materials Requisition Manufacturing Overhead Account Direct materials Indirect materials Materials used may be either direct or indirect.

32. © 2006 McGraw-Hill Ryerson Ltd.. Job-Order Costing Document Flow Summary Job Cost Sheets Employee Time Ticket Manufacturing Overhead Account An employee’s time may be either direct or indirect Direct Labour Indirect Labour

33. © 2006 McGraw-Hill Ryerson Ltd.. Job-Order Costing Document Flow Summary Manufacturing Overhead Account Other Actual OH Charges Job Cost Sheets Applied Overhead Materials Requisition Employee Time Ticket Indirect Material Indirect Labour

34. © 2006 McGraw-Hill Ryerson Ltd.. Job-Order System Cost Flows Let’s examine the cost flows in a job-order costing system.

35. © 2006 McGraw-Hill Ryerson Ltd.. Raw Materials Material Purchases Mfg. Overhead Work in Process (Job Cost Sheet) ActualApplied Direct Materials Indirect Materials Job-Order System Cost Flows

36. © 2006 McGraw-Hill Ryerson Ltd.. Cost Flows – Material Purchases Raw material purchases are recorded in an inventory account.

37. © 2006 McGraw-Hill Ryerson Ltd.. Cost Flows – Material Usage Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used are charged to Manufacturing Overhead and also decrease Raw Materials.

38. © 2006 McGraw-Hill Ryerson Ltd.. Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Direct Labour Indirect Materials ActualApplied Indirect Labour Job-Order System Cost Flows

39. © 2006 McGraw-Hill Ryerson Ltd.. Cost Flows – Labour The cost of direct labour incurred increases Work in Process and the cost of indirect labour increases Manufacturing Overhead.

40. © 2006 McGraw-Hill Ryerson Ltd.. Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Direct Labour Indirect Materials ActualApplied Indirect Labour Job-Order System Cost Flows Other Overhead

41. © 2006 McGraw-Hill Ryerson Ltd.. Cost Flows – Actual Overhead In addition to indirect materials and indirect labour, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they are incurred.

42. © 2006 McGraw-Hill Ryerson Ltd.. Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Direct Labour Indirect Materials ActualApplied Indirect Labour Job-Order System Cost Flows Other Overhead Overhead Applied Overhead Applied to Work in Process If actual and applied manufacturing overhead are not equal, a year-end adjustment is required.

43. © 2006 McGraw-Hill Ryerson Ltd.. Cost Flows – Overhead Applied Work in Process is increased when Manufacturing Overhead is applied to jobs.

44. © 2006 McGraw-Hill Ryerson Ltd.. Nonmanufacturing Cost Flows Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the period incurred. Examples: 1. Salary expense of employees that work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred. Examples: 1. Salary expense of employees that work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred.

45. © 2006 McGraw-Hill Ryerson Ltd.. Nonmanufacturing Cost Flows Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.

46. © 2006 McGraw-Hill Ryerson Ltd.. Finished Goods Work in Process (Job Cost Sheet) Direct Materials Direct Labour Overhead Applied Cost of Goods Mfd. Job-Order System Cost Flows

47. © 2006 McGraw-Hill Ryerson Ltd.. Cost Flows – Cost of Goods Manufactured As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process.

48. © 2006 McGraw-Hill Ryerson Ltd.. Finished Goods Cost of Goods Sold Work in Process (Job Cost Sheet) Direct Materials Direct Labour Overhead Applied Cost of Goods Mfd. Cost of Goods Sold Job-Order System Cost Flows

49. © 2006 McGraw-Hill Ryerson Ltd.. Cost Flows – Sales When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record COGS and reduce Finished Goods.

50. © 2006 McGraw-Hill Ryerson Ltd.. Defining Under- and Overapplied Overhead The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is termed either underapplied or overapplied overhead. Underapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period. Overapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period.

51. © 2006 McGraw-Hill Ryerson Ltd.. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labour hours worked on jobs. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labour hours worked on jobs. How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labour hour. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labour hours worked on jobs. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labour hours worked on jobs. How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labour hour. Overhead Application Example Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labour Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

52. © 2006 McGraw-Hill Ryerson Ltd.. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labour hours worked on jobs. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labour hours worked on jobs. How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labour hour. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labour hours worked on jobs. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labour hours worked on jobs. How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labour hour. Overhead Application Example Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labour Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 PearCo has overapplied overhead for the year by $30,000. What will PearCo do?

53. © 2006 McGraw-Hill Ryerson Ltd.. Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. Quick Check

54. © 2006 McGraw-Hill Ryerson Ltd.. Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. Quick Check Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000 Underapplied Overhead $1,210,000 - $1,160,000 = $50,000 Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000 Underapplied Overhead $1,210,000 - $1,160,000 = $50,000

55. © 2006 McGraw-Hill Ryerson Ltd.. Disposition of Under- or Overapplied Overhead $30,000 may be closed directly to cost of goods sold. Cost of Goods Sold PearCo’s Method Work in Process Finished Goods Cost of Goods Sold $30,000 may be allocated to these accounts. OROR

56. © 2006 McGraw-Hill Ryerson Ltd.. Disposition of Under- or Overapplied Overhead PearCo’s Mfg. Overhead Actual overhead costs $650,000 $30,000 overapplied PearCo’s Cost of Goods Sold Unadjusted Balance Adjusted Balance $30,000 Overhead applied to jobs $680,000

57. © 2006 McGraw-Hill Ryerson Ltd.. Allocating Under- or Overapplied Overhead Between Accounts Assume the overhead applied in ending Work in Process Inventory, ending Finished Goods Inventory, and Cost of Goods Sold is shown below:

58. © 2006 McGraw-Hill Ryerson Ltd.. Allocating Under- or Overapplied Overhead Between Accounts We would complete the following allocation of $30,000 overapplied overhead:

59. © 2006 McGraw-Hill Ryerson Ltd.. Allocating Under- or Overapplied Overhead Between Accounts

60. © 2006 McGraw-Hill Ryerson Ltd.. Overapplied and Underapplied Manufacturing Overhead - Summary PearCo’s Method

61. © 2006 McGraw-Hill Ryerson Ltd.. Quick Check What effect will the overapplied overhead have on PearCo’s net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease. What effect will the overapplied overhead have on PearCo’s net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease.

62. © 2006 McGraw-Hill Ryerson Ltd.. Quick Check What effect will the overapplied overhead have on PearCo’s net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease. What effect will the overapplied overhead have on PearCo’s net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease.

63. © 2006 McGraw-Hill Ryerson Ltd.. Multiple Predetermined Overhead Rates To this point we have assumed that there is a single predetermined overhead rate called a plantwide overhead rate. Large companies often use multiple predetermined overhead rates. May be more complex but... May be more accurate because it reflects differences across departments.

64. © 2006 McGraw-Hill Ryerson Ltd.. Job-Order Costing in Service Companies Job-order costing is used in many difference types of service companies.

65. © 2006 McGraw-Hill Ryerson Ltd.. The Use of Information Technology Technology plays an important part in many job-order cost systems. When combined with Electronic Data Interchange (EDI) or a web- based programming language called Extensible Markup Language (XML), bar coding eliminates the inefficiencies and inaccuracies associated with manual clerical processes.

66. © 2006 McGraw-Hill Ryerson Ltd.. Review Problem Job-Order Costing

67. © 2006 McGraw-Hill Ryerson Ltd.. Review Problem Text P.107 Hogle Company is a manufacturing firm that uses job-order costing. On January 1, the beginning of its fiscal year, the company’s inventory balances were as follows:  Raw materials$20,000  Work in process 15,000  Finished goods 30,000

68. © 2006 McGraw-Hill Ryerson Ltd.. Review Problem The company applies overhead cost to jobs on the basis of machine-hours worked. For the current year, the company estimated that it would work 75,000 machine hours and incur $450,000 in manufacturing overhead cost.

69. © 2006 McGraw-Hill Ryerson Ltd.. Review Problem The following transactions were recorded for the year:  Raw materials were purchased on account, $40,000.  Raw materials were requisitioned for use in production, $380,000 ($360,000 direct materials and $20,000 indirect materials).  The following costs were incurred for employee services: direct labour, $75,000; indirect labour, $110,000; sales commissions, $90,000; and administrative salaries, $20,000.

70. © 2006 McGraw-Hill Ryerson Ltd.. Review Problem  Sales travel costs were incurred, $17,000.  Utility costs were incurred in the factory, $43,000.  Advertising costs were incurred, $180,000.  Depreciation was recorded for the year, $350,000 (80% relates to factory operations, and 20% relates to selling and administrative activities).  Insurance expired during the year, $10,000 (70% relates to factory operations, and the remaining 30% relates to selling and administrative activities).

71. © 2006 McGraw-Hill Ryerson Ltd.. Review Problem  Manufacturing overhead was applied to production. Due to greater than expected demand of its products, the company worked 80,000 machine hours during the year.  Goods costing $900,000 to manufacture according to their job cost sheets were completed during the year.  Goods were sold on account to customers during the year at a total selling price of $1,500,000. The goods cost $870,000 to manufacture according to their job cost sheets.

72. © 2006 McGraw-Hill Ryerson Ltd.. Review Problem 1.Prepare journal entries to record the preceding transactions. 2.Post the entries in (1) above to T-accounts (do not forget to enter the opening balances in the inventory accounts). 3.Is Manufacturing Overhead underapplied or overapplied for the year? Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold. Do not allocate the balance between ending inventories and Cost of Goods Sold. 4.Prepare an income statement for the year and a statement of cost of goods manufactured.

73. © 2006 McGraw-Hill Ryerson Ltd.. Appendix 3a The Predetermined Overhead Rate & Capacity

74. © 2006 McGraw-Hill Ryerson Ltd.. Predetermined Overhead Rate and Capacity Calculating predetermined overhead rates using an estimated, or budgeted amount of the allocation base has been criticized because: 1.Basing the predetermined overhead rate upon budgeted activity results in product costs that fluctuate depending upon the activity level. 2.Calculating predetermined rates based upon budgeted activity charges products for costs that they do not use. Calculating predetermined overhead rates using an estimated, or budgeted amount of the allocation base has been criticized because: 1.Basing the predetermined overhead rate upon budgeted activity results in product costs that fluctuate depending upon the activity level. 2.Calculating predetermined rates based upon budgeted activity charges products for costs that they do not use.

75. © 2006 McGraw-Hill Ryerson Ltd.. Capacity-Based Overhead Rates Criticisms can be overcome by using estimated total units in the allocation base at capacity in the denominator of the predetermined overhead rate calculation. Let’s look at the difference!

76. © 2006 McGraw-Hill Ryerson Ltd.. An Example Equipment is leased for $100,000 per year. Running at full capacity, 50,000 units may be produced. The company estimates that 40,000 units will be produced and sold next year. What is the predetermined overhead rate?

77. © 2006 McGraw-Hill Ryerson Ltd.. An Example Equipment is leased for $100,000 per year. Running at full capacity, 50,000 units may be produced. The company estimates that 40,000 units will be produced and sold next year. What is the predetermined overhead rate? Traditional Method = $2.50 per unit $100,000 40,000 = Capacity Method = $2.00 per unit $100,000 50,000 =

78. © 2006 McGraw-Hill Ryerson Ltd.. Quick Check Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case. Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case.

79. © 2006 McGraw-Hill Ryerson Ltd.. Quick Check Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case. Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case.

80. © 2006 McGraw-Hill Ryerson Ltd.. Quick Check Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case. Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case.

81. © 2006 McGraw-Hill Ryerson Ltd.. Quick Check Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case. Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case.

82. © 2006 McGraw-Hill Ryerson Ltd.. Quick Check When capacity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a. The predetermined overhead rate goes up when activity goes down. b. The predetermined overhead rate stays the same; it is not affected by changes in activity. c. The predetermined overhead rate goes down when activity goes down. When capacity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a. The predetermined overhead rate goes up when activity goes down. b. The predetermined overhead rate stays the same; it is not affected by changes in activity. c. The predetermined overhead rate goes down when activity goes down.

83. © 2006 McGraw-Hill Ryerson Ltd.. Quick Check When capacity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a. The predetermined overhead rate goes up when activity goes down. b. The predetermined overhead rate stays the same; it is not affected by changes in activity. c. The predetermined overhead rate goes down when activity goes down. When capacity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a. The predetermined overhead rate goes up when activity goes down. b. The predetermined overhead rate stays the same; it is not affected by changes in activity. c. The predetermined overhead rate goes down when activity goes down.

84. © 2006 McGraw-Hill Ryerson Ltd.. Quick Check When estimated activity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a.The predetermined overhead rate goes up when activity goes down. b.The predetermined overhead rate stays the same; it is not affected by changes in activity. c.The predetermined overhead rate goes down when activity goes down. When estimated activity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a.The predetermined overhead rate goes up when activity goes down. b.The predetermined overhead rate stays the same; it is not affected by changes in activity. c.The predetermined overhead rate goes down when activity goes down.

85. © 2006 McGraw-Hill Ryerson Ltd.. Quick Check When estimated activity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a.The predetermined overhead rate goes up when activity goes down. b.The predetermined overhead rate stays the same; it is not affected by changes in activity. c.The predetermined overhead rate goes down when activity goes down. When estimated activity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a.The predetermined overhead rate goes up when activity goes down. b.The predetermined overhead rate stays the same; it is not affected by changes in activity. c.The predetermined overhead rate goes down when activity goes down.

86. © 2006 McGraw-Hill Ryerson Ltd.. Basing the rate on capacity

87. © 2006 McGraw-Hill Ryerson Ltd.. Basing the rate on expected volume

88. © 2006 McGraw-Hill Ryerson Ltd.. End of Chapter 3